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Standard & Poor's warns of downgrade on Eurozone credit ratings

December 5, 2011 | 2:58
pm

Standard & Poor's warned Monday that it might lower its ratings on the long-term debt of nearly all countries in the Eurozone, including economic powerhouse Germany, because of the ongoing debt crisis.

The rating firm said it put the sovereign debt of the 15 nations on a negative "credit watch" because "systemic stresses" in the European monetary union have risen to the point that they are putting "downward pressure" on the region as a whole.

Among the reasons cited by S&P are tightening credit, continued disagreements among policymakers about how to handle crisis, high levels of government and household debt and a "rising risk" of a recession in the region in 2012.

"Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the Eurozone as a whole," S&P said.

The news, which began leaking out before U.S. markets closed, rattled investors and cut into a rally by the Dow Jones industrial average that had been fueled by the announcement by French and German leaders that they would push for a plan to force Eurozone countries to stick to tough spending limits.

S&P's move shortly after markets closed in New York caused stock-index futures prices to drop across the board, indicating a lower open for stocks Tuesday.

The negative credit watch means that S&P could downgrade the ratings of all the Eurozone countries -- except for Greece and Cyprus -- within 90 days. Greece wasn't warned because its low CC rating indicates "a relatively high near-term probability of default." Cyprus was already on negative credit watch.

S&P said it would review the credit ratings of the 15 nations after the European Union summit at the end of the week and hope to announce all the results at the same time.

"We are of the view that the upcoming European summit ... provides an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far toward restoring investor confidence," S&P said of its decision to make the downgrade warning before the meetings.

Germany's long-term AAA rating is at risk, along with the AAA ratings of France, Finland, Austria, Luxembourg and the Netherlands. In August, S&P downgraded U.S. government long-term debt one notch, from AAA to AA+, because of the inability of leaders in Washington to strike a deal to rein in the nation's growing debt.

The company said it believes that the long-term ratings of Germany, Austria, Belgium, Finland, Luxembourg and the Netherlands are unlikely to fall more than one notch if they are downgraded. The other nine Eurozone nations would be unlikely to fall more than two grades.